Congress, the administration, and the Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the American people. They claim that every action they have taken has been done with the best interests of Main Street not Wall Street in mind. Whether their intentions can be believed is questionable. After all, they are politicians. One thing is certain; the short term results of their actions have not benefited Main Street.
As we all know by now, the goal of Washington’s gross intervention in the economy is to unfreeze the credit markets with injections of massive amounts of liquidity. This unfreezing will allow financial institutions to resume regular lending thereby putting us on the road to recovery. In other words, the same device (debt) that got us into this mess will get us out of it. That argument aside, as was reported in this column a couple of weeks ago, the best laid plans of Washington are once again going astray. In that column, I reported that instead of unfreezing the credit markets allowing for a freer flow of capital and lower lending rates, the government’s actions so far have actually resulted in higher mortgage rates and consequently less borrowing. This is a result of more government debt pushing up the yields on Treasury notes which in turn raises mortgage rates. Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for his own firms — Fannie and Freddie — when they seek to sell their securities. To compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages. As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie bailout was launched.
Article comments
1 - Les Slater
The problem is not fundamentally liquidity. It is the low likelihood of making a sufficient profit from investments. It doesn't matter how much capital there is or how cheaply it is to borrow. Even free money is not attractive to capitalists if they stand to lose part of it by investing.
Unemployment is now rising, or will soon rise, in most countries. It is predicted by many economists that U.S. rate will be between 8 and 8.5% before the end of the year. We already see how this is affecting consumer spending. Consumer, and as a consequence, commercial spending, will continue to drop as unemployment rises.
At present there is a very strong likelihood that we are headed for a 30's style depression. There are beginning signs of deflation.
Economists are hoping, beyond hope, that the Chinese economy will be the motor force to prevent a general worldwide collapse. The problem is that the markets that China sells to are ALL tanking.
2 - Les Slater
Nobody else has commented on this topic to date, however there are those in the financial industry that are beginning to see some of the things I'm talking about.
In today's Financial Times, Merrill chief sees severe global slowdown:
"The global economy is entering a slowdown of epic proportions, comparable to the Great Depression, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday."
3 - Francois Breton
I approve your comments concerning billions dollars bonuses to company that has been helped by money coming from the people. It is probably impossible to recuperate this money. But would there be a way in "inviting" the concerned people in investing the money received in the compagnies. If they have faith in the survival of the compagny it would be just an investement.
By publicising this, it would be ticklish for them to refuse.
François Breton
4 - bliffle
Looks like a well-orchestrated looting of the US treasury, setup by the Bush administration as a parting gift to their friends in the financial 'industry'.
5 - bliffle
The cynical reality of Kenns opening sentence becomes more obvious every day: "Congress, the administration, and the Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the American people."